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Financial Knowledge for Divorcing Couples: Where Do You Start?

By: Investor Solutions

By: Investor Solutions, Inc.

Divorce can be a messy, lengthy and pricey process. Unwinding a marital union is never as easy as coming together. The impact on the family, both emotionally and financially can be quite devastating. But, as difficult as the separation may be, it is imperative for both parties to get a grip and approach things in a business-like fashion. Understanding your rights, obligations and financial position can help smooth out the process and save money for both parties. Whether or not your divorce is amicable, you should be aware of a number of issues that will directly impact you. This two part series will review a number of financial related matters to consider during a divorce.

Information Gathering

The first thing couples should do is to organize a file containing any basic financial information. An itemized net worth statement would help and other items should include:

  • retirement account records for both spouses
  • a copy of the deed or lease agreement on your primary home and other properties
  • copies of all insurance policies including life, health, homeowners, and auto
  • current statements for all bank and brokerage accounts as well as mutual fund statements
  • statements for IRA’s, pension, retirement plans and employer stock options or buyout agreements should not be overlooked
  • statements of liabilities including all outstanding loans, mortgages and credit cards
  • copies of estate planning documents including wills, trusts; powers of attorney and copies of birth certificates and marriage licenses.
  • tax returns for the past five years

Community Property vs. Common Law

Any discussion on the division of assets must begin by identifying the type of state the couple lives and has lived in: community property or common law states. How, when and how you owned the property will determine how and to whom that property is divided.

Community property is also known as marital property and is recognized in the following states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In a community property state, assets are deemed to be either separate property or community (marital) property. Separate property is defined as property that was owned by either spouse before the marriage or was acquired by one spouse after marriage as a gift, inheritance, bequest or devise. Income that was generated as a result of a separate property is also considered separate property. Any separate property that becomes commingled with community property is presumed to be community property. For example, if you merge a brokerage account established before marriage with a joint account established after marriage, that account is now deemed to be community property from that point forward. Once it is commingled, it usually stays that way. However, it is possible in some community property states for the spouses to change their respective ownership rights in an asset, from community property to separate property and vice-versa, simply by written agreement between them.

In a community property state, all property that is owned or acquired by a married person is considered to be community property unless the person can prove that it is separate property. This requires an accurate accounting of transaction history. With community property, each spouse is deemed to own one-half of the property and has an equal right to manage and control of the community property. However, neither spouse may enter into any form of agreement to buy, sell, or mortgage the property without the other spouse’s consent.

Upon divorce, community property is divided equally and is deemed to be owned by husband and wife as tenants in common. Likewise, any debts incurred during marriage are generally debts of the couple. At the death of one spouse, the decedent’s half of the community property goes to the surviving spouse unless a will disposes of the property differently.

One last reminder regarding community property assets, be aware that if you have ever lived in a community property state while married, property that became “community property” in that state retains that character even if you move to a non-community property state!

Common law states have a different set of rules. Most states are common law states where identifying ownership of assets is a little easier than in community property states. If only your name is on the deed, registration document or other title paper, it’s yours and you are free to leave your property to whomever you choose, subject to your spouse’s right to claim a certain share after your death.

If both spouses own title to the asset, then each owns a half-interest. The ability to give away or leave that half-interest to someone else depends on how the spouses share ownership. Property owned as “joint tenancy with right of survivorship” or “tenancy by the entirety,” automatically belongs to the surviving spouse when one spouse dies — no matter what the deceased spouse’s will says. If, however, property is owned as “tenancy in common”, then each spouse can leave their half-interest to someone other than a spouse. If a specific property has no title document, generally you own it if you paid for it or received it as a gift.

In common law states, there is no requirement that marital property be equally divided. So, the typical “50-50″ split that frequently occurs in divorce settlements is not necessarily automatic. Divorce courts in common law states aim to simply be fair. However being fair does not necessarily translate into an equal division of assets. For women, this may be an enormous economic value whereby the wife’s historical role as homemaker is finally recognized by divorce courts.

My next article will discuss matters relating to child support, spousal maintenance and credit. Stay tuned.